Cannon Bid as Major Studio Is Cliffhanger : Firm's Future at Risk in High-Stakes Gamble

If they made an autobiographical film, they might call it "The Israelis Who Invaded Hollywood." They would, of course, "protect the downside" by pre-selling the television and home video rights to what would qualify as the latest action thriller from the upstart Cannon Group.

"They" are the irrepressible Menahem Golan and Yoram Globus, Cannon's chairman and president, respectively, and owners of about 40% of the company's stock.

Long treated as outsiders by Hollywood's power structure, the two cousins have bootstrapped what was a debt-ridden independent movie company when they took control of it in 1979 into a "mini-major" studio that is producing 35 movies for theatrical release this year.

While some--such as "Invaders from Mars" and "Texas Chainsaw Massacre II"--are in the old action-film genre that made Cannon successful, more and more are so-called mainline pictures.

Golan's and Globus' Cannon has become a darling of Wall Street and the entertainment press here and abroad. In full-page ads in trade papers, the company recently hailed itself as "the company of the future."

Now, the company is attempting a high-stakes gamble. It has nearly doubled the number of films it makes--some with budgets and big stars matching those of the major studios, and has bought a British entertainment giant with hundreds of movie screens and its own studio.

Nonetheless, a growing number of observers believe that the long-term success of Cannon is still very much in doubt, given the huge new debt it has taken on to finance its gamble and its recent lack of film hits.

Star-struck Wall Street investors have provided plenty of money to finance the big plunge by Golan and Globus. Underwritten by the New York investment banker Drexel Burnham Lambert, Cannon raised a handsome $207 million from public investors just last spring.

In addition, domestic and foreign banks led by First National Bank of Boston have made available about $100 million in revolving lines of credit.

And Cannon has managed to report rising corporate profits recently even though its movies have for the most part been disappointments at the box office in the last year or so. Last week, the company reported a second-quarter profit of $5.7 million, up from $3.1 million the year before. For all of 1985, the company had earnings of $15.2 million, compared to $12.2 million in 1984.

Despite all the cash the company has raised, it disclosed last week that its working capital--the funds available for acquisitions and new film productions--had decreased to a negative $105.5 million as of June 28 from a positive $32.7 million a year earlier. The company hasn't said what it intends to do about it, but observers say it might have to sell more stock or major assets.

Asked in a recent interview if the company had cash flow problems, Globus said, "We don't have any problem." But he said the company hasn't made any decision on whether to seek to raise more money on Wall Street. "Right now, there is nothing on the agenda, I can tell you." He said Cannon's 1986 film production is completed. But to finance films planned for 1987, "we are going to our (bank credit) lines," he said.

Informal SEC Inquiry

Meanwhile, Cannon disclosed last week that the Securities and Exchange Commission has begun an informal inquiry into the way in which the company accounts for its film costs and revenue. Those methods already had been a topic of discussion in Hollywood, and some experts have criticized Cannon's accounting for possibly giving too optimistic a cast to the company's financial picture.

"They keep reporting higher earnings on pictures that nobody goes to see," observes Gordon Crawford, a senior vice president of Capital Guardian Research in Los Angeles. "They are fortunate to have a very forgiving Wall Street that keeps providing new capital to make films despite their spotty record."

Meanwhile, since raising that $207 million in a debenture sale last spring and $100 million in earlier offerings, Golan and Globus have been on a corporate spending spree.

Cannon's biggest expenditure by far was the $270-million acquisition last May of Screen Entertainment, formerly Thorn-EMI, a major British movie theater chain and movie studio with a large film library. Since then, the new division reported a sharply lower profit of $1.5 million for 1985, although Cannon has been selling theaters and licensing its new film library to cash in on its new acquisition.

The acquisition includes 106 theaters with 287 screens, making Cannon the biggest theater owner in England. "(We) stole the company--as much as we paid," Globus boasts.

The purchase drew rave notices from some securities analysts, led by Lee Isgur of Paine Webber, but others have reserved judgment because of what they consider the high price.

Meantime, Cannon has been trumpeting grander and grander film projects, some with the higher price tags (and higher-priced talent) that Golan and Globus used to avoid.